5.2 Causes of Loss Forms, Business Income and Builders Risk

Commercial Causes of Loss Forms

The BPP must be combined with one of three ISO Causes of Loss forms to determine which perils are insured:

1. Basic Form (CP 10 10)

Named-perils form covering 11 perils:

1. Fire
2. Lightning
3. Explosion
4. Windstorm or Hail (interior damage covered only if wind/hail first damages exterior roof or walls creating an opening)
5. Smoke (sudden and accidental)
6. Aircraft or Vehicles
7. Riot or Civil Commotion
8. Vandalism
9. Sprinkler Leakage
10. Sinkhole Collapse (settlement into subterranean voids created by water action on limestone)
11. Volcanic Action

2. Broad Form (CP 10 20)

Named-perils form covering all 11 Basic perils, plus 3 additional perils:

• Falling Objects (exterior roof/walls must be penetrated first)
• Weight of Snow, Ice, or Sleet
• Water Damage (accidental discharge or leakage from plumbing or heating systems)
• Additional Coverage — Collapse: Covers abrupt falling down or caving in of a building or part of a building caused by specified perils, hidden decay, insect damage, weight of people/contents, or defective construction methods if during construction.

3. Special Form (CP 10 30)

An open-perils ("all-risk") form insuring direct physical loss unless explicitly excluded or limited.

• Burden of Proof: The insurer bears the legal burden to establish that an exclusion applies.
• Exclusions: Earth movement, flood/water damage, governmental action, nuclear hazard, ordinance or law, utility services failure off-premises, war, fungus/mold, mechanical breakdown, wear and tear, rust, smog, settling, nesting/infestation by insects or animals, and employee dishonesty/theft.
• Special Theft Dollar Limits: The Special Form limits theft of furs to $2,500, jewelry and watches to $2,500, patterns and dies to $2,500, and stamps/tickets to $250.

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Summary of Commercial Causes of Loss Forms

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Business Income & Extra Expense Coverage Form (CP 00 30)

Commercial property claims frequently result in devastating operational shutdown. The Business Income form protects against indirect / consequential financial loss:

Business Income

Reimburses the actual loss of Business Income sustained due to necessary suspension of operations during the "period of restoration": $\text{Business Income} = \text{Net Profit (or Loss) before Taxes} + \text{Continuing Normal Operating Expenses (including payroll)}$

Period of Restoration

• Commencement: Begins 72 hours after direct physical damage occurs from a covered cause of loss. (This 72-hour period acts as a time deductible).
• Termination: Ends on the date when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or when business is resumed at a new permanent location.

Extra Expense

Covers necessary additional expenses incurred during the period of restoration that would not have been incurred had there been no direct physical damage. Unlike Business Income, Extra Expense coverage begins immediately upon direct physical loss (no 72-hour waiting period).

• Purpose: Paid to avoid or minimize the suspension of business operations (e.g., leasing temporary office space, expedited freight charges for replacement machinery, or hiring temporary workers).

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Builders Risk Coverage Form (CP 00 20)

Insures commercial and residential buildings during the course of construction. Covers the structure, foundation, fixtures, machinery, and building materials/supplies intended to become a permanent part of the building within 100 feet.

Critical Termination Triggers

Adjusters must memorize the exact conditions that terminate Builders Risk coverage. Coverage ceases upon the earliest of:

1. The policy expires or is cancelled.
2. The property is accepted by the purchaser.
3. The insurable interest of the insured ceases.
4. The project is abandoned with no intention to complete.
5. 90 days after construction is completed.
6. 60 days after the building is occupied in whole or in part or put to its intended use.

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Additional Coverages Inside CP 00 30

Adjusters lose more money on the additional coverages than on the insuring agreement, because each one has its own trigger and its own clock.

Civil Authority

Pays business income and extra expense when a covered cause of loss damages property other than the insured premises and a civil authority then prohibits access to the insured premises. Two conditions must both be met: access to the area immediately surrounding the damaged property is prohibited as a result of that damage and the described premises sit inside that area but not more than one mile from the damaged property, and the action was taken in response to dangerous physical conditions or to give the authority unimpeded access.

• Business income under Civil Authority begins 72 hours after the first prohibiting action and runs for up to four consecutive weeks.
• Extra expense under Civil Authority begins immediately and ends four consecutive weeks after the action or when the Civil Authority business income coverage ends, whichever is later.

This is the provision Florida adjusters argue over after a hurricane. A county-wide evacuation order issued before landfall is not triggered by damage to other property, and a bridge closed for debris removal three miles away fails the one-mile test.

Alterations and New Buildings

Extends business income and extra expense to damage at the described premises involving new buildings or structures whether complete or under construction, alterations or additions to existing buildings, and machinery, equipment, supplies or building materials used in that construction. If the damage delays the start of operations, the period of restoration begins on the date operations would have begun.

Extended Business Income

Ordinary business income ends when the property is repaired and operations resume. Extended Business Income continues the coverage while revenue climbs back to its pre-loss level, for up to 60 consecutive days after operations resume. It does not cover income lost to unfavorable business conditions in the area — the post-hurricane exodus of customers from a barrier island is excluded even though the storm caused it.

Optional Coverages: Suspending or Reshaping Coinsurance

Business income is normally written subject to a coinsurance percentage measured against the net income and operating expenses the insured expects over the next 12 months, documented on the Business Income Report/Work Sheet. Four optional coverages change that arithmetic:

Two related forms round out the family: CP 00 32 is Business Income without Extra Expense, and CP 00 50 is the standalone Extra Expense Coverage Form for an insured whose real exposure is the cost of staying open rather than lost revenue.

Worked Example: A 90-Day Shutdown

A Tampa printing plant with a $600,000 business income limit written on a Monthly Limit of Indemnity of 1/4 is shut down by a covered fire. Actual loss of business income is $190,000 in the first 30 days, $150,000 in the second, and $90,000 in the third.

The uncovered $40,000 is the price of the monthly cap; because the 72-hour period of restoration deductible also applies, the first three days of downtime are the insured's as well.

Florida Overlay on Commercial Property Claims

Three Florida rules follow a commercial property adjuster into the field.

• The prompt-pay clocks reach small commercial risks. F.S. § 627.70131 is written for residential claims, but § 627.70131(7)(b) also pulls in structure or contents claims under a commercial property policy where the structure is 10,000 square feet or less, and contents claims under a commercial tenant policy where the leased premises are 10,000 square feet or less. It expressly excludes policies covering nonresidential commercial structures or contents in more than one state. A neighborhood restaurant claim runs on the statutory clocks in Chapter 14; a multi-state distribution center claim does not.
• Commercial residential carries its own hurricane deductible menu. Under F.S. § 627.701(8) an insurer writing commercial lines residential coverage — condominium and cooperative associations, apartment buildings — may offer a deductible of up to 5 percent of insured value for a condominium or cooperative association policy and up to 10 percent for other commercial residential policies, but only if it also offers a 3 percent option at issuance and at every renewal.
• The residential valuation statutes stop at the property line. F.S. § 627.7011 governs the offer of replacement cost and law and ordinance coverage on homeowners policies, so a strip-mall, warehouse or factory loss is valued by the policy language and the coinsurance clause rather than by the residential replacement-cost rules covered in Chapter 13.